Ravi Chandran
Inadequate capital is the cause of many small business failures.
By: Hitesh Khan/
Planning for the proper initial capitalization for your business or expansion is a critical process in which to invest time and effort. There are two basic paths to finding capital for your business. The assets of your firm can be financed by obtaining either debt or equity.
Debt is often obtained in the form of a loan which must be repaid with interest. Banks are the most common source of financing through debt, though there are some alternatives you can look at if you have inadequate capital.
The first place to look for money is yourself. How much money do you have to invest in your business as equity capital? Look at your cash savings, stocks, bonds, surrender value of life insurance, or other retirement accounts, and equity in real property.
How much of your personal assets you are willing to risk in the business is a personal decision. However, you must invest at least some of your own money in the business, because most lenders see this as evidence of your level of commitment to the business.
If you have inadequate capital to meet all the financial needs of your business, then you must turn to a lender or investor for the balance.
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If you approach either a lender or investor, prepare a BUSINESS PLAN that includes both an industry and market analysis, projected balance sheets, income statements, and cash flow projections. Capital sources prefer these financial projections monthly for the first year, and then annually for three years. The amount of detail and research needed in the financial projections is directly related to the amount of outside capital you hope to secure.
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The plan should also contain information about you and anyone directly connected to the operation of the business, including the relevant business experience of each of the principles. Your demonstrated ability to effectively plan the financial needs of your new venture will be a major consideration of any lender or investor you approach.
Many small businesses (and possibly most start-up firms) are financed by borrowing from friends and family. These sources may not require a formal business plan. If you have inadequate capital however, presenting one can often be a very important part of your request for assistance from this group of potential lenders or investors.
This source of capital offers the potential for particularly stressful circumstances. If you borrow from a friend or relative, treat it as a formal business transaction by putting the agreement in writing. You can have a
lawyer assist you with the contract to insure its enforceability.
Payment terms offered by your suppliers are another potential source of funds if you have inadequate capital.
Discounts for early payment and penalties for late payment constitute virtual extensions of credit. It may pay, in some cases, to borrow from another source in order to meet a supplier’s early payment deadline if the discount offered is greater than the interest you would pay on the short term loan.
Do not depend too much on trade credit from one supplier, though. If repayment problems arise, you may find your major source for supplies cut off when you need it most.
When customers pay for work in advance or provide some of the materials of service themselves, they are in effect financing the business. It is not uncommon to ask for all or a portion of payment as cash up front, especially when providing a long term service or ordering special items.
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Reducing expenses is really a way of raising capital because it frees up funds that would have been spent otherwise. One way to reduce cash outflow is to lease assets rather than buy them. Anything from office furniture to food processing equipment can be leased.
In the long run, leasing is generally more expensive than bank financing. Also, leasing is often limited to items that have a long serviceable life, transferable use, or are easily repossessed in the event of default. As part of the lease agreement, you may be able to negotiate the purchase of the leased equipment at the end of the lease period.
When you have inadequate capital, you may also consider licensed moneylenders who make both personal and business loans at interest rates several points above that which banks charge. Like banks, such finance companies focus on your ability to repay the loan. However, they are more willing than banks to rely on the quality of your collateral rather than your track record or profit projections.
How to Secure Personal Loans Quickly
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